- Budget deficit
- The budget deficit is the amount by which government spending exceeds tax revenue over one year, and so what the government borrows in that year.
- National debt
- The national debt is the total amount that the government has borrowed over time and has not yet repaid.
The two parts of a deficit
Can you name the two parts of a budget deficit?
Part of any deficit comes from the state of the economy and part does not.
The cyclical deficit is the part of the deficit caused by a weak economy, as tax receipts fall and welfare spending rises, and it disappears as activity returns to normal.
Can you think of an example?
In a recession, with no change in tax rates or benefit rules, receipts fall by £30 billion and welfare spending rises by £10 billion. That £40 billion of extra borrowing goes away as the economy recovers.
The structural deficit is an estimate of the deficit if the economy were at a normal, sustainable level of employment and activity, so recovery does not remove it.
Can you think of an example?
Even with the economy at normal activity, a government would still spend £50 billion a year more than it raises. Only a decision to raise taxes or cut spending closes that gap.